The Darling Consulting Group team has been in contact with hundreds of banks and credit unions since the bank failure situation unfolded rapidly in March – and as it continues play out, contributing to widespread fear. Clearly, there were risk management processes that could have been improved. We have been assessing (and as news breaks, reassessing) the situation with our typical ALCO focus in mind: thoughtfully exploring risk/return tradeoffs of potential strategic options to better position our clients to optimize income safely and soundly.
To this end, institutions may consider a range of options that are specific to their individual business models and balance sheet profiles. Below we highlight additional actions that may be more widely applicable to all institutions.
Mobilize Your Contingency Liquidity Team & Policy
☐ First and foremost, put your liquidity contingency plan in motion. It is critical to quickly assess your particular situation and ensure appropriate and consistent internal and external communications at your institution.
Externally-Focused Activities to Consider
☐ Be proactive with your largest relationships. Help them understand how your business model is different than what they may read in the headlines.
☐ Be prepared to highlight key elements of your financial strength and to tell “your story.”
☐ Be prepared to offer options to those seeking additional protection (e.g., reciprocal insured deposit programs, customer repos, etc.).
☐ Make sure communication is consistent and controlled by the appropriate personnel. There can be a fine line between communicating productively and stirring up potential concerns.
Notwithstanding the “uninsured deposit” issue, some institutions have received inquiries by large depositors seeking to move monies from other institutions to theirs. Actions to consider in this scenario may include:
☐ Initially, view such deposits as short-term funding (hopefully at an attractive rate) to reduce existing borrowings or hold in cash equivalents at a spread. The interest rate received may not be the depositor’s immediate highest priority, and some or all of these monies could very well be with your institution as temporary parking until they assess their individual situation.
☐ At inception or shortly thereafter, ensure that the depositor sign the appropriate paperwork enabling you to sell all or a portion of their deposits into one-way sell insured deposit programs. This will provide flexibility in managing capital ratios and creating off-balance sheet liquidity, if appropriate.
Internally-Focused Activities to Consider
☐ Revisit uninsured deposit levels and impact of potential volatility.
☐ Establish protocols for handling inquiries from larger depositors.
☐ Ensure that requests for large outgoing wires are reported without delay to appropriate person(s) for immediate reaching out to discuss and attempt to head-off the wire execution.
☐ Monitor deposit activity across your institution in as real time as possible/practical.
☐ Assess existing capacity to generate same-day funding as well as settlement timelines for other sources (e.g., brokered deposits, one-way buy insured deposits, etc.). Establish priorities and contingencies.
☐ Ensure access to the Federal Reserve (Discount Window & Borrower-In-Custody program) and identify all collateral that could be pledged to the Fed that not currently pledged elsewhere.
☐ Identify the extent to which securities in AFS could be sold at gains or negligible losses, if necessary.
☐ Revisit the potential for additional unrealized security losses to push tangible book value below zero and/or below any restrictive thresholds monitored by your FHLB.
☐ Communicate regularly with all internal stakeholders about current position and action plans.
☐ Strive to create clarity and minimize fear-based overreactions that may have unintended consequences.
☐ Assess the merits of immediately drawing down FHLB borrowings as a contingency measure.
Clearly, the above is not an exhaustive list of potential activities. Because there are many different and subtle nuances to individual business models and risk positions, your institution’s action plan should be specific to your situation. We encourage you to Contact DCG to discuss this checklist and how it may best apply to your institution’s needs and goals.
© 2023 Darling Consulting Group, Inc.